Rising Prices Drive Japanese Households to the Brink, Sparking Consumption Tax Debate Ahead of Election

Inflationary Pressures Mount on Japanese Households

Japan is grappling with sustained price increases that are significantly impacting household finances, pushing the issue to the forefront of the upcoming general election. Recent data indicates that the nation's average annual inflation rate stood at 3.27% in 2023 and 2.7% in 2024. While the year-on-year inflation rate saw a moderation to 2.1% in December 2025 from 2.9% in November, and core inflation (excluding fresh food and energy) was 2.4% in December 2025, these figures remain above the Bank of Japan's target of 2%.

The financial squeeze is widely felt, with a survey revealing that over 99% of households perceive rising prices as a burden, and 81.6% feeling it 'strongly'. Food items have been particularly affected, with rice cited by 63.8% of respondents as the most impacted, followed by vegetables at 14.6%, along with snacks, beverages, meat, and seafood. Consequently, households are adjusting their spending habits, with 47% cutting back on food and dining out, and 30.1% reducing expenses on hobbies and leisure. A Bank of Japan survey in July 2025 highlighted the severity of the situation, with 61% of respondents reporting feeling 'less financially comfortable' than the previous year, marking a 16-year high.

Political Parties Propose Consumption Tax Relief

With a general election for the House of Representatives scheduled for February 8, 2026, major political parties are actively campaigning on pledges to alleviate the financial burden on households by lowering the consumption tax. The current consumption tax rate is 8% on food products and 10% on dining out.

• The ruling Liberal Democratic Party (LDP), led by Prime Minister Sanae Takaichi, has proposed considering a two-year exemption for food products from the consumption tax.
• The opposition Centrist Reform Alliance (CRA), formed by the Constitutional Democratic Party of Japan and Komeito, advocates for a permanent reduction of the consumption tax on food products to zero.
• The Democratic Party for the People (DPP) suggests maintaining the tax rate at a flat 5% until wage growth aligns with a stable 2% inflation rate.
• Other parties, such as the Japanese Communist Party, aim to lower the consumption tax to 5% across the board, with a long-term goal of abolition, while the Social Democratic Party seeks to reduce it to zero. The Conservative Party of Japan has also pledged a permanent zero consumption tax on food.

Economic Concerns and Bank of Japan's Stance

Economists have voiced concerns regarding the feasibility and fiscal implications of these proposed consumption tax cuts. They warn that such 'populist' commitments could jeopardize Japan's strained fiscal health. For instance, the LDP's plan alone is estimated to reduce tax revenue by approximately 5 trillion yen annually.

Meanwhile, the Bank of Japan (BoJ), in its January 2026 policy meeting, opted to maintain its key short-term interest rate at 0.75%. Despite the recent deceleration in inflation, the BoJ signaled its readiness to implement further tightening measures if economic activity and inflation trends align with its projections. The central bank anticipates inflation to move towards its 2% target in fiscal 2026.